Judgement Day Deferred?

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Time for a quick look at TiVo’s results.

On the surface things looked good. 9.8% increase in Gross Adds year over year. SAC dropped $20 to $287.

 But the good news on the surface is just that. The SAC was lowered by a change in the timing of how rebates and hardware costs are recognized and channel fill, which I estimate at over $6M. It will be necessary to look at 6 months – Q3 & Q4 – together to get a comparable picture to last year. A quick look at those numbers, based on TiVo’s Q4 expectations, shows a significant deterioration in the SAC measurement expected for second half 2007 and for all of 2007 vs. 2006. A loose calculation raises 2007 expected SAC several dollars over what I previously expected. Going into 2008, SAC would deteriorate far more, unless, as TiVo mentions, their strategy changes yet again.

Predictions for Gross Ads in Q4 are disappointing, especially in relation to the increase in Q3. GA is predicted at last year’s 221K. It will have cost several million dollars more to add roughly 9K more Subs. Furthermore, while Q3 GA is better than 2006, it isn’t compared to 119K in 3Q05.

The bottom line is that the cost of adding Subs is much higher than before. TiVo claims an increase of around $3/mo in average ARPU for new Subs, but won’t translate that into a NPV. Is that $3 good for 12 months, 18, 36? SAC is still $100 too high and climbing.

ARPU declined $.15 from last quarter. This is distressing relative to the claim of $3 extra on new Subs. Who is churning, the $12.95 folks? Speaking of Churn, it was up some too; enough to be noticeable and to become a big problem if such increases continue a couple more QTRs. However, Churn too should have benefited ARPU, no?

ACPU (Cost of Service Revenue divided by Average Monthly Subs) increased by over $.05/mo. No reason given I could find, but I guess costs of new features are increasing this more than a larger Sub base is offsetting.

The result of ARPU/ACPU is Service Margin dropped to 78% – from what is traditionally over 80% (SM also fell to 74% from 75% on the SA only calculation.) All this data is adverse to the claim of higher NPV for new Subs.

DTV ARPU sank again as did Subs, but not too badly for the latter. However, TiVo said that DTV Sub decline accelerated during the QTR, which may indicate a good jump in losses in Q4.

So what happened to Service Revenues? They fell over Q2! The news SA Subs didn’t offset the DTV losses. Rogers’ spin is TiVo added higher value SAs while losing low value DTVs. Well, run the numbers and it doesn’t look as good as that sounds.

What happened to Ad Revenue? It declined too. Why? TiVo says advertisers made general cuts in their budgets not specific to TiVo. My translation is they cut the spending generally for avenues not working or of little interest. If TiVo’s Ad Biz had any punch, it would grow to offset any budget cuts from old clients. Doesn’t look good.

Was the bottom line better this year? Well, take off $3.4M in lower legal expense plus another $6M+ in accounting changes and it looks far worse. I frankly could not make out the answer regarding the IBM Patent payment.

The Conference Call was rife with comments about the Retail Pricing plans introduced on Nov. 5th being experimental. They are going to find out what results and adjust next year. TiVo is risking its most important selling season in that season’s most important channel without knowing what they are doing. What else is new?

Anyway, that’s some of it. There is so much more, but I can’t think of anything else really positive to mention when it is put in context. Oh, wait, they are going to distribute through Comcast in Mexico City some day.

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